Tuesday, April 03, 2012

Capita And The Fallacy Of Offshore

The IT news media carried stories this week that Capita is to lay off an expected 1,000 staff (other sources say only 400) and move their jobs to India.  These are all jobs Capita's IT Services division (the one that managed to put forward more than 200 products, out of 1700 odd total, on the G-Cloud framework).

They're certainly late to the party as TechMarketView pointed out.  They may even be too late.  I worked for an organisation that moved much of its IT development to India in the early 90s, and by 1992 their team there were assessed as CMM Level 5 (which, I appreciate, doesn't mean the output is good, just that the processes are highly repeatable - so plenty of potential for highly repeatable rubbish).  In 2001 I moved some UK government work offshore - I think we were probably the first to do it then, but others have followed since - we used it mostly for burst capacity (when we didn't have the capacity locally and needed only very short term work to be carried out) but we also did some IT development.

In 2001/2 I advised some companies that said that they were struggling to attract and retain staff what I had learned in the 90s.  I suggested that competing with the local majors - Wipro, Tata, Infosys etc just as much then as now - would be challenging as people would be naturally attracted to home grown brand (one solution I proposed was to do a dual-listing on the Indian stock market and start presenting a carefully cultivated local image) - but that the bigger problem would be the inevitably high staff turnover.

In moving work offshore - not just India but any perceived low cost economy - before I'd quickly seen that if you are first, you enjoy the pick of the people and you get the lowest rates - but just as anomalies close in the stock market - everyone else discovers this same opportunity and competition for resource increases.  Soon you are paying more and your staff are, anyway, leaving for just a thousand pounds or more a year - when the base salary is £10,000, moving for £11,000 can be an easy decision.  Turnover rates can quickly reach 20% and even 40% or more - with the worst rates being in the relatively lower skilled jobs.  Your costs go up both directly - salaries - and indirectly - replacing lost skills over and over again.   Local brands have shown that they can manage this attrition better than foreign brands but not always.

I don't know that the economies are really there in cost terms now.  I'd be surprised if they are as obvious as they once were certainly - especially when you offset redundancy costs from the UK, transition costs, the need to maintain a mixed team, turnover, travel and so on.  Once the cost economies are gone - and I think they finished in 2002 or maybe 2003 - the real benefit comes in being able to use your offshore capability as a kind of "service delivery cloud."  By that I mean if your work comes in irregular peaks and troughs, you use offshore resource to allow you to quickly stand up a set of trained, smart people - and then you move them on to something else when the peak moves on.  But you'd probably be better off partnering in doing that, giving up the few points of margin in return for not needing to manage the whole process.

So 20 years after it became popular, have Capita latched on to a trend that has already moved on?  Are they the last one buying into the idea of a January rally?  I think they probably are.  Chasing the low cost option means being very quick on your feet and opening new operations regularly as market anomalies open and close - it can also mean being ready to move work back to the UK because you have capacity or capability there (or, in this climate, because it turns out it is actually the lowest cost environment, either in direct labour costs or in costs measured against quality of service). Capita already operate services - particularly BPO - overseas so they will know all of this.

In a market where the UK government says that they want to use more SMEs, they want to give business to companies that pay tax in the UK, where unemployment is increasing and where quality of service is an important consideration in evaluations, I think they may not know it deeply enough.

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